A Child Tax Credit Compromise for the Real World

Published January 30, 2024

The Dispatch

Leave your ideal system aside; here in the real world, tax codes are used for all sorts of purposes. States that want to make a Hollywood splash pass tax credits to lure film production companies. Progressives like to pass tax provisions that will reward environmentally conscious companies. Various R&D tax credits are justified, according to their supporters, because they encourage firms to invest in socially beneficial activities they may not otherwise have. 

What, then, is the rationale for the child tax credit (CTC)? And how should we think about the recent deal reached by Democratic Sen. Ron Wyden and Republican Rep. Jason Smith, currently being negotiated in Congress, that could incrementally expand the CTC for low-income families? 

For many progressives, the argument for the CTC is fairly straightforward. They see the high rates of child poverty in the U.S. as a scandal and believe cash payments would bring families out of poverty. The Biden administration, famously, enacted this goal for six months with its pandemic-era transformation of the CTC into near-universal child benefits—monthly payments to all but the very richest parents, simply for having a child. 

Many on the right oppose this approach. The Heritage Foundation, for example, claims that over 90 percent of the proposed CTC changes in the Wyden-Smith bill are “cash welfare payments,” a callback to the worst kind of dependency that was supposed to have been reformed in the 1990s. Similarly, Advancing American Freedom—an advocacy group founded by former Vice President Mike Pence—opposes the Wyden-Smith deal for transforming the CTC “into yet another welfare program.” 

These claims are extremely contestable. The benefits under discussion would only be available to families with a wage earner bringing in a modest income. And as the debate over Sen. Mitt Romney’s proposed Family Security Act illustrated in 2022, there is nearly universal consensus among Republican politicians that any support for families through the tax code needs to be connected to work, helping parents stay in the job market and increasing their odds of self-sufficiency.  No part of Wyden-Smith would come close to restoring the pandemic-era “work-free, unconditional cash aid” that Heritage ominously warns about.

The reason why many conservatives—such as Ryan Ellis of the Center for a Free Economy and Oren Cass of American Compass—support the CTC has less to do with its anti-poverty function and more because of its recognition that parents incur costs related to the bearing and raising of children that society as a whole benefits from. The Wyden-Smith deal would take a modest step toward improving the CTC’s ability to support families, most notably by ensuring low-income families with multiple kids aren’t worse off than those with only one child. 

First and foremost, the CTC serves as a modest subsidy for those who have kids at home. In its simplest incarnation, parents take a certain amount per child off of their income tax liability. Currently, the CTC is set to $2,000 per kid (though it could be cut in half next year without congressional action). 

So far, so straightforward. But what about parents whose federal income tax liability is lower than the CTC amount they could otherwise receive? A family of four with an income of $32,000, for example, would be eligible for a total of $4,000 in CTC but would only owe (assuming no other deductions or credits) $430 in federal taxes. The CTC wipes out all of their liability, but there’s still a difference of $3,570.

Currently, this family would receive that difference as a direct payment known as the additional child tax credit. In 2023, low-income and working-class taxpayers can receive up to $1,600 per child through this “refundable” tax credit. So our family from above can currently receive a payment of $3,200 on top of its $430 in direct tax relief—a total benefit of $3,630, short of the full $4,000 a family with a higher income would receive.

The Wyden-Smith deal focuses specifically on families who make too little to benefit from the full amount of the CTC, particularly those with more than one child. If it passes, the refundable part of the CTC would be increased. It would also be calculated based on a per-child, rather than per-household, basis. As the Niskanen Center’s Josh McCabe estimates, this would effectively make any family working full-time at the federal minimum wage eligible for the maximum refundable amount. Our family of four would now receive a total benefit of $3,600 for 2023 and $3,800 in 2024. 

Another point of contention is the deal’s introduction of a so-called “lookback” option, which would allow households to use the prior year’s income to bolster their CTC eligibility if their income from the current tax year was too low. Pence’s group, scholars at the American Enterprise Institute (AEI), and the Wall Street Journal editorial board have rained down fire on this provision, worrying that it would lead to low-income workers dropping out of the labor force. 

Yes, “lookbacks” have been used in the past for natural disasters like Hurricane Katrina and so they may not be fully appropriate as a permanent addition to tax policy. But even so, skeptics’ concerns seem largely overblown. Even if there were some parents who wanted to drop out of the labor force and rely on their earnings from the prior year to qualify for CTC payments, they would be incentivized to rejoin the subsequent year when their eligibility expires. Kyle Pomerleau, a senior fellow at AEI, disagreed with his colleagues’ estimates on labor supply and the CTC. Similarly, the Congress’ Joint Committee on Taxation estimated the “lookback” option would have a minimal impact on labor supply.

All of these proposed changes are fairly modest and targeted to a specific slice of the population. (Most families will hardly notice any difference at all.) They’re paired with business-friendly R&D incentives, affordable housing tax credits, disaster relief, and—crucially for fiscal hawks—paid for over the short run by ending the pandemic-era employee retention credit. 

The path forward for the Wyden-Smith deal is still rocky. Republican leadership in the House seem to have created a pathway for it to go to the floor for a vote, perhaps as early as this week. But it’s far from a done deal. Republicans from high-tax states like New York and California have quietly threatened to undermine the package if it doesn’t include adjusting the state and local tax deduction. In the Senate, key Republicans remain unenthused; if all Democrats vote in favor, 10 GOP senators would need to support a bill to get it across the finish line.  

And all these tweaks, while well-intentioned, still ignore a more fundamental question: What is the CTC for?

Is it, as many on the left would have it, meant to reduce child poverty? It may help—some estimates have it lifting 400,000 children above the poverty line—but the poorest families, with no or little income, are left out of this agreement by design. Is it meant as a substitute for increasing parents’ choices for care when their children are young? As progressive policy analyst Elliot Haspel wrote, a slightly more generous CTC won’t address some of the problems in the child care industry. Is it meant to reduce abortion rates, or boost our nation’s declining fertility rates? While a tangible gesture in a pro-life direction, the amounts in question are far from sufficient to do much on those fronts.

The strongest argument for the Wyden-Smith deal may be the most precarious to say out loud. Because it increases benefits for those working but who have little or no federal tax liability, the compromise lays the groundwork, however tentatively, for a broader rethinking of the way our nation addresses child benefits. 

The kind of holistic improvement envisioned by Romney a few years ago would treat low-income, middle-income, and high-income families even-handedly. The best case for the CTC, or other child-related tax benefits, is the one that recognizes the burdens parents bear, particularly in an era of declining fertility, and recognizes the intergenerational interest all of us have in making having a family a little more achievable. Allowing benefits to phase-in on a per-child, rather than per-household basis, would help instantiate that policy goal. 

The CTC is not—and shouldn’t be—an explicit incentive aimed at having more children, or a reward for having both parents in the workforce (or, for that matter, one at home). Instead, it should aim to give parents a little more flexibility to raise their families in the way they deem best—to pay for food, diapers, child care, school uniforms, or whatever their stage in life needs most. 

The Wyden-Smith deal would help, though it’s far from a cure-all. It could also be a lamentable excuse for inaction, if Congress decides they already “fixed” the CTC and broader pushes for reform lose momentum. After all, if Congress doesn’t act, the $2,000 value of the CTC for all families will be cut in half next year.  That reality, and the need to support families in an era of declining birth rates, should push members of Congress to take the Wyden-Smith deal. As a deal for the real-world, the compromise moves the needle in the right direction.

Patrick T. Brown is a fellow at the Ethics and Public Policy Center, where his work with the Life and Family Initiative focuses on developing a robust pro-family economic agenda and supporting families as the cornerstone of a healthy and flourishing society.

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